KUALA LUMPUR (July 24): Kenanga Research has maintained its “underperform” rating and target price (TP) on Sime Darby Plantation Bhd while revising its net dividend per share (NDPS) upward, following the conclusion of the sale of two of its Indonesian oil palm plantation subsidiaries.

The research firm said it revised upward Sime Darby Plantation’s NDPS to eight sen in FY2023 from five sen, but has maintained NDPS in FY2024 at five sen.

Meanwhile, the research house kept its TP unchanged at RM3.65, according to a research note on Monday (July 24), as it believes the counter is overpriced compared to its peers.

“SIMEPLNT offers defensive land-rich net tangible assets (NTA), improving gearing with firm CPO prices stabilising,” said its analyst Teh Kian Yeong.

“However, SIMEPLT looks expensive for now, trading at a premium to integrated peers and 24% above our TP of RM3.65 derived from 15 times FY2023F cash earnings per share (CEPS) with no ESG premium in view of its average 3-star scoring.”

On April 14, the plantation company agreed to divest its subsidiaries for Indonesian rupiah 1,750 billion or RM518 million as part of a settlement agreement with PT Asa Karya Multi Pratama, who is the buyer-cum-plaintiff.

The buyer-cum-plaintiff had earlier filed a suit against Sime Darby Plantation and claimed correspondence between the two parties had established a sale-and-purchase obligation at a price of RM488 million.

“Subsequent to 14 April 2023, the Central Jakarta District Court on June 22, 2023 heard the case involving the recent agreement and on July 21, 2023 pronounced that both parties are obliged to adhere to the settlement agreement the parties had entered into in April 2023,” said Teh.

He said that Sime Darby Plantation will thus receive RM518 million with an estimated disposal gain of RM107 million and the resolution of a longstanding legal dispute.

“No change of our forecasts as we had adjusted our earnings for the settlement back in April 2023 with a slightly lower plantation contribution but also lower interest charges as some of the proceeds will help pare working capital borrowings.”

The research firm also said that crude palm oil price is likely to stay firm at around RM3,700 over FY2023-2025f with a possible upside from El Nino, but cost pressure could ease from second half of 2H2023 onwards.

“Although global edible oil supply is improving year-on-year, so is demand thus inventory is likely to stay fragile into FY2024.”

“Compound this with a pending El Nino due end-2023 or early 2024, the risk of a supply downgrade come 2024 is higher today than it was six months ago.”

“A serious El Nino can drag down oil palm yield.”

Teh also noted that while the cost of labour is set to continue rising in Malaysia and Indonesia, overall cost pressure on the plantation sector should ease in 2H2023 on lower fertiliser prices, softer energy costs, and harvests that peak in the second half seasonally, which will spread out the unit costs.

At noon break, Sime Darby Plantation’s share price stood lower by one sen or 0.22% at RM4.52, valuing the company at RM31.33 billion.